Millionaires Flee California After Tax Hike

According to new research released by Charles Varner, associate director of the Stanford Center on Poverty and Inequality, California lost an estimated 138 high-income individuals following passage of the Proposition 30 income tax increase championed by Gov. Jerry Brown (D) and approved by Golden State voters in 2012.

This new research by Varner updates a previous paper released six years ago that looked at domestic migration to and from California following a 2004 income tax hike.

“One reason we wanted to update our previous paper is that this tax change in 2012 is the largest state tax change that we have seen in the U.S. for the last three decades,” Varner said.

Prop. 30 raised the state’s top income tax rate by more than 29%, increasing it three percentage points from 10.3% to 13.3%, which is now the highest state income tax rate in the nation. Prop. 30 also hiked the tax rate on income between $300,000 and $500,000 by two percentage points (a 21.5% rate increase), and raised the rate on income between $500,000 and $1,000,000 by three percentage points (a more than 32% rate hike).

In 2016, California voters extended the Prop. 30 income tax increases, which were originally scheduled to expire in 2019, until 2030. There will be an effort to extend those income tax hikes yet again prior to their expiration in 2030; book it now.

Varner’s new research examined taxpayers who were and were not hit by the Prop. 30 rate hikes. He found that in the two years before the Prop. 30 tax hike was imposed (2011 and 2012), net in-migration for both groups “was positive and roughly constant.” Yet following 2012 and the passage of Prop. 30, net in-migration dropped for households that were facing an effective tax increase of 0.5 percent or more. The reduction was greatest for households facing the highest effective tax hike, according to Varner and his coauthors.

This isn’t surprising for those who are familiar with other attempts to soak the rich with punitive state income tax hikes on high earners. Take what happened in Maryland after Martin O’Malley, the former Democratic presidential candidate and governor, imposed a millionaires tax hike a decade ago.

PHILADELPHIA, PA. -- WEDNESDAY, JULY 27, 2016: Former Governor of Maryland Martin O'Malley at the 2016 Democratic National Convention, in Philadelphia, Pa., on July 27, 2016. (Photo by Marcus Yam/Los Angeles Times via Getty Images)

In 2008, in an attempt to address a state budget deficit brought about by Maryland’s structural overspending problem, then-Gov. O’Malley championed and enacted a new millionaire income tax bracket, raising the rate to 6.25%. A May 2009 Wall Street Journal editorial described the disappearance of one-third of the state’s millionaires in the year following O’Malley’s tax increase:

One year later, nobody's grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller's office concedes is a 'substantial decline.' On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year -- even at higher rates…All of this means that the burden of paying for bloated government in Annapolis will fall on the middle class. Thanks to the futility of soaking the rich, these working families will now pay Mr. O'Malley's ‘fair share.’”

Some, like the folks at Next 10, a San Francisco-based think tank, point to high housing costs as a more important factor than high taxes when it comes to what is driving people to leave California. While it’s clear that up is the only direction in which most California legislators want to take the state’s overall tax burden, it’s uncertain what action, if any, California officials will take to reduce exorbitant housing costs. When given the opportunity to institute a modest reform this year to help alleviate the high cost of housing, California officials declined.

Earlier this year Assemblyman Scott Wiener (D-San Francisco) introduced Senate Bill 827, legislation that would permit higher density housing near mass transit stops statewide. Passage of 827 would’ve permitted apartment buildings of up to five stories to be constructed near stations for San Francisco’s BART, Los Angeles‘s Metro Rail, and other mass transit stops throughout California. Despite claims that they are defenders of the downtrodden, Democrats who have steep majorities in both chambers of the California legislature were unable to pass Wiener’s bill. The failure to enact Wiener’s bill, which policy experts across the political spectrum viewed as a reasonable reform with which to begin addressing high housing costs, leaves little hope for those who want to see California lawmakers repeal or reform regulations that unnecessarily inflate the cost of housing.

Going back to California’s high tax burden, Varner’s new research backs up the old adage that when you tax something you get less of it. That applies whether the thing being taxed is cigarettes, booze, or, in California’s case, millionaires.

Patrick Gleason is vice president of state affairs at Americans for Tax Reform, and a senior fellow at the Beacon Center of Tennessee. Follow Patrick on Twitter: @PatrickMGleason